Sunday, August 23, 2015

THE HISTORY OF U.S.RELATIONS WITH OPEC: LESSONS TO POLICYMAKERS

By JAREER ELASS and AMY MYERS JAFFE

SEPTEMBER 2010

"...Nixon and Kissinger believed that if Israel was victorious in the war, the Arab countries would realize that the best way to achieve their objectives would be through cooperation with the United States and its diplomatic efforts rather than by seeking military backing from the Soviet Union..."

"...However, Saudi Arabia was recognizing the need to put an end to the embargo, particularly after Shah Mohammed Reza Pahlavi of Iran proposed what some referred to as the “Christmas Eve massacre”—a more than doubling of the pric e of oil from $5.12 to $11.66 a barrel at a December 1973 meeting in Tehran. King Faisal wa s aware that such a gigantic price jump, coupled with a reduction of OP EC output, would prove disasterous to the West and undermine Washington’s ability to thwart communism. Three days later, Saudi Arabia led other Arab OPEC members in agreeing to increase their output, beginning the end of the embargo. However, Arab oil ministers only unconditionally lifted the embargo on March 18, 1974, after Kissinger had demonstrated movement on an Israeli-Egyptian resolution to the conflict, with the kingdom announcing a one million b/d boost in its oil production..."

"...In this post-embargo period, the United States began to work on diplomatic strategies to reduce the power of OPEC. As Henry Kissinger notes in his memoir, Years of Renewal, “For the power of OPEC to be broken, solidarity among the industrial democracies had to be established across a wide front, both political and economic.” Nixon called a Washington Energy Conference in February 1974 and that led to the establishment of the Energy Coordinating Group (ECG). As President Ford took office, this ECG was being institutionalized into the International Energy Agency (IEA), with a substantive program in “emergency sharing; energy conservation; active development of alternative energy sources; creation of a financial safety net.” The United States also appealed to key countries like Saudi Arabia to consider the benefits of consumer-producer cooperation. U.S. bilateral economic development commissions were created with Saudi Arabia and Iran, with an eye to encourage the use of oil surpluses for nation building and development projects. The U.S. aim was to “reduce the producers’ free funds for waging economic warfare or blackmail against the industrial democracies, and to return some of the extorted funds to our economy.” ..."

"... As student protests against the Shah Pahlavi began in Iran in early 1978, Iran and Saudi Arabia came together that following June to thwart efforts by price hawks within OPEC to fix the price of OPEC oil in a currency other than the U.S. dollar. At the very least, these hawkish producers were pushing to raise the price of OPEC oil to mitigate the declining purchase value of their oil revenues resulting from world inflation and the diminishing worth of the U.S. dollar, the currency in which OPEC was being paid for its oil...."

"By the summer of 1984, Saudi Arabia surprised its OPEC colleagues and the oil markets by exceeding its voluntary quota of 4.5 million b/d by one million b/d, causing oil prices to slide further. The Saudi move was ostensibly the result of the kingdom’s decision to exchange some 34 billion barrels of oil for 10 new Boeing 747 jetliners in a massive oil for goods barter arrangement—a deal brokered by the Reagan administration. Significantly, the Boeing planes oil barter deal involved a hidden discount for the Saudi oil at below official prices and as such destabilized the oil market even more.

By the summer of 1985, Saudi Arabia’s production had fallen to just 25 percent of its capacity, and the kingdom made the decision to start an oil price war to claw back its market share. The result was a price collapse, with oil hitting a low of $8.76/bbl (OPEC basket equivalent) in July 1986. It is unclear how much influence, if any at all, that the Reagan administration had on the Saudi decision to flood the markets with its oil in 1986. But the United States was certainly grateful for lower oil prices that perhaps, not coincidentally, also helped bankrupt and disable the Soviet Union, which was dependent upon oil for its hard currency.

The improvement in U.S.-Saudi relations and a unified worldview about the Soviet Union was accompanied by similarly friendly oil relations. Saudi Arabia sought oil refining and downstream investments in the United States and, in 1981, Saudi Oil Minister Hisham Nazer made an important policy pronouncement during a visit to Harvard University. Nazer called for a system of “reciprocal energy security” and implied that, in return for demonstration of security of demand on the part of the United States, America could gain guaranteed access to a “fairly priced ocean of oil...

...Oil markets were generally oversupplied and oil prices remained relatively low during the late 1980s, despite the continuation of the Iraq-Iran war through 1988. From 1987 to 1990, Kuwait and other GCC members of OPEC “helped keep oil prices down by exceeding OPEC-assigned production quotas.” The low prices not only helped the U.S. and global economy, adding to demand for GCC oil, but also were thought to hurt the pocketbooks of Iran and Iraq, thereby containing their potential military threat within the greater Gulf region. However, this reprieve ended quickly when Iraq invaded Kuwait on August 2, 1990. Within days, President George H.W. Bush had authorized the dispatch of American troops to Saudi Arabia as part of Operation Desert Shield. On August 6, the U.N. Security Council established strict economic sanctions on Iraq, effectively outlawing all Iraqi and Kuwaiti oil exports. Supplementing a request made in person by then-U.S. Defense Secretary Richard Cheney to allow U.S. troops in Saudi Arabia to ensure that Iraq did not continue to Saudi borders and to position the United States to repel the Iraqi invasion, the U.S. president sent a letter to King Fahd requesting that the kingdom increase its oil production to a maximum level to assure that the impact of the loss of Iraqi and Kuwaiti crude oil would be ameliorated. King Fahd granted the request, and Saudi Arabia began investigating how much oil was needed in the market—and how quickly it could expand its output potential to meet this demand..."

"...OPEC disarray in the early years of the Clinton White House took oil prices off the front burner in the United States again for several years. Ironically, the Clinton administration’s first tangle with OPEC came not from concerns that the cartel would restrict oil output and hurt the U.S. economy, but from fears that sharply falling oil prices might harm important U.S. allies such as Mexico. As oil prices fell to under $10/bbl in the wake of the Asian financial crisis of 1998, Energy Secretary Bill Richardson during a visit to Riyadh—which was ostensibly scheduled to discuss American oil firms participating in the potential upstream opening in Saudi Arabia that had been broached to U.S. oil firms by then-Crown Prince Abdullah in late 1998—reportedly raised the administration’s concerns about market oversupply and extreme price volatility with Saudi leadership. At a joint news conference with Richardson, Saudi Oil Minister Naimi said oil markets were oversupplied and that the kingdom promised to take steps to avoid harming the global economy. Former Saudi Oil Minister Yamani, speaking in Houston in the fall of 1999, told an audience that Richardson had “saved the oil industry” through his discussions with Naimi and the Saudi leadership, as the secretary had “persuaded” the kingdom into changing policy to help lift prices. The Saudis did not appear to require much of a push to want to restore prices, with the kingdom reportedly set on re-capturing a WTI price of $18-20/bbl as quickly as possible. .."